How is money demand affected on a graph with the interest rate on the vertical axis and money quantity on the horizontal axis when the interest rate rises ?
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Answer: B. decrease the quantity demanded of money
Explanation
Higher interest rates raise the cost of holding cash, reducing the quantity of money demanded. On a standard liquidity preference graph, higher interest rates move the economy upward along the curve. The quantity of money demanded drops as holding non-interest assets becomes expensive. The money demand curve graphs interest rates vertically against money quantity horizontally. People hold money for transactions, precautionary, and speculative motives. Bond yields represent the primary opportunity cost of holding liquid money balances.
Central banks manipulate interest rates to control money supply and stabilize inflation. Financial markets adjust asset portfolios rapidly when interest rate targets change. Understanding money market graphs is fundamental for macroeconomic monetary analysis. Increasing money demand contradicts the negative slope of the liquidity preference curve. Shifting the entire demand curve represents a different phenomenon than moving along it. Other options fail to describe the movement along the existing money demand curve.
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